Bell Canada Shares Dive After Court Bars Buyout

Friday

May 23, 2008 at 4:54 AM

As shares in Bell Canada declined, many investors and analysts turned their attention to alternatives for the company should its $51.8 billion privatization fail.

OTTAWA — As shares in Bell Canada declined by the most in at least two decades on Thursday, many investors and analysts turned their attention to alternatives for the company should its $51.8 billion privatization fail.

Shares of Bell fell 12 percent on the Toronto Stock Exchange, closing at 32.64 Canadian dollars, after an appellate court decision released Wednesday night revoked court approval for a leveraged buyout led by the Ontario Teachers’ Pension Plan.

Trading in Bell was so heavy that it overwhelmed computer systems and forced the exchange to halt trading in the company at 2:14 p.m. Steve Kee, a spokesman for the exchange, said he expected that trading would resume Friday morning.

Two factors contributed to the rush away from Bell’s stock and concern about the viability of the buyout, which would, if completed, be the largest private equity deal ever. First, the buyout’s fate now rests to a considerable extent on the Supreme Court of Canada’s first agreeing to hear Bell’s appeal and then overturning the appellate court’s decision.

Second, a consortium of banks led by Citigroup, which are lending about $30 billion to finance the buyout, are trying to change their lending terms substantially. People knowledgeable about the demands of the banks have said the drastic nature of the changes suggests that the lenders want to withdraw from the deal.

“It’s now at a level where we have to consider if there’s a deal at all,” said Dvai Ghose, an analyst with Genuity Capital Markets in Toronto. “The $52 billion question now is what the supreme court will do and when.”

Other analysts were similarly pessimistic, although some said that it might be possible for Bell to negotiate a settlement with the angry bondholders behind the court challenge that blocked the deal.

The Quebec Court of Appeal accepted the argument of the bondholders that Bell had not demonstrated that it made an effort to treat them fairly in the transaction. Under Canadian law, a court, as well as shareholders, must approve the transaction.

The debt loaded onto Bell is expected to depress the values of its current bonds by increasing the company’s credit risk.

In a note to investors, Jonathan Allen of RBC Capital Markets estimated that it might take 1.3 billion Canadian dollars to placate the current bondholders. He suggested that such a settlement could be accomplished by reducing the takeover price to 41.11 Canadian dollars a share, from the 42.75 Canadian dollars a share that shareholders accepted.

But reopening the deal would be fraught with difficulties. It is not certain that shareholders, who would have to vote on any changes, would be open to a lower offer. Any renegotiation might also provide an avenue for skittish banks to escape their lending commitments, which were made last June, before the current credit market crisis.

Mr. Ghose is among those who believe that Telus, a smaller communications company that is the dominant carrier in Western Canada, might take advantage of the current confusion to bid for Bell.

Like many analysts, he assumed that Telus would make a bid using cash and stock rather than the all-cash deal proposed by the leveraged buyout group. That might suit the individual shareholders in Canada who own Bell stock, many of whom complained that a privatization would exclude them from holding a continuing stake in the company.

But the Canadian government is trying to increase competition in the wireless communications market by offering additional radio spectrum to newcomers. Mr. Ghose said that, without its wireless business, Bell would hold little appeal for Telus. So the merged company would have to come up with other proposals to win approval from regulators and competition officials.

The court decision in favor of the bondholders was unexpected by lawyers and analysts. On Thursday, several of them said that the supreme court would probably hear Bell’s case and might well rule in its favor.

“I don’t think this has really been tested at the supreme court,” said Richard C. Powers, a lawyer who is assistant dean of the Rotman School of Management at the University of Toronto. Bell, he added, “does have a very strong case here, the question is how quickly the court will move.”

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